How to think about taking profits from investment?

Diesel3390

Hi I'm getting muddled in my own head about how to take profits 

Lets say I have two investment  ISAs.
Both £1000 pots. One invested FTSE100, the other S&P 500.

Both funds grow 5%, so a total of £100 profit.

If I want to take that £100 profit, does it make a difference whether I:
A) take £50 from each pot, leaving them both back at £1000

Or 

B ) take the overall profit of £100 from one of the pots, leaving one pot with £950 and the other with £1050.

Overall I have taken the same amount out in both scenarios but am I thinking it wrong with scenario B?

--------------------

Me and wife basically have multiple ISAs and we look at profit from a total perspective across all our pots, but if we make £100 from the total of all pots, we are thinking about only withdrawing the total from one of the pots...

HappyHarry

It is always tempting to take from one rather than the other, but have a think about the remaining pots.

You originally decided to have a 50/50 split across the S&P and the FTSE100. 

If you only draw from one of those funds, then you start to drift away from your original 50/50 split. In the long term you could find yourself drifting towards a 60/40 split or even more unbalanced.

If your view on your portfolio balance has changed, then a different split is not a concern. However if you still think that a 50/50 split is most appropriate for you then every time you make a withdrawal you have the opportunity to rebalance your funds.

Linton

Why take profits? Do you need the money?  Better in the long term to stay invested.  If you need cash from time to time I suggest you keep a separate cash/emergency account topped up from your income rather than moving in and out of investments.


Presumably you chose 50% UK, 50% US 0% ROW for a good reason. Has anything changed to cause you to move to a different allocation?  Again if there is no reason to change it dont change.

cloud_dog

Diesel3390 said:

Hi I'm getting muddled in my own head about how to take profits 

Lets say I have two investment  ISAs.
Both £1000 pots. One invested FTSE100, the other S&P 500.

Both funds grow 5%, so a total of £100 profit.

If I want to take that £100 profit, does it make a difference whether I:
A) take £50 from each pot, leaving them both back at £1000

Or 

B ) take the overall profit of £100 from one of the pots, leaving one pot with £950 and the other with £1050.

Overall I have taken the same amount out in both scenarios but am I thinking it wrong with scenario B?

--------------------

Me and wife basically have multiple ISAs and we look at profit from a total perspective across all our pots, but if we make £100 from the total of all pots, we are thinking about only withdrawing the total from one of the pots...

The 'profits' are how your investment grows, how you achieve an inflation beating return over the longer term.

Why would you want to take the profits?  

To answer your question of when you might start taking the 'profits' (so to speak), it is when you need the money, you have reached your target / goal.

The only other time you might look at the profit (growth really) is if you are applying some rebalancing across your investments and you don't want your investment allocation get too far of the designated 'norm', e.g. 20% in the UK and 80% in the S&P500 (oe whatever the allocation and investments are).

dunstonh

If I want to take that £100 profit, does it make a difference whether I:
A) take £50 from each pot, leaving them both back at £1000

Or 

B ) take the overall profit of £100 from one of the pots, leaving one pot with £950 and the other with £1050.

Withdrawals should be used to rebalance you back closer to your target weightings for your investment strategy.

If you don't have an investment strategy then it really doesnt matter what you do because the whole thing is pretty unstructured and adding a few more unstructured decisions won't change it.

I assume your example funds are just that for simplicity of example and not how you are really invested (oh dear if they are your only two funds).

poseidon1

Diesel3390 said:

Hi I'm getting muddled in my own head about how to take profits 

Lets say I have two investment  ISAs.
Both £1000 pots. One invested FTSE100, the other S&P 500.

Both funds grow 5%, so a total of £100 profit.

If I want to take that £100 profit, does it make a difference whether I:
A) take £50 from each pot, leaving them both back at £1000

Or 

B ) take the overall profit of £100 from one of the pots, leaving one pot with £950 and the other with £1050.

Overall I have taken the same amount out in both scenarios but am I thinking it wrong with scenario B?

--------------------

Me and wife basically have multiple ISAs and we look at profit from a total perspective across all our pots, but if we make £100 from the total of all pots, we are thinking about only withdrawing the total from one of the pots...

Actually, your question is a good argument in favour of buying income rather than accumulation units for each trust. You get the benefit/ satisfaction of annual income cash flow automatically, without ever having to consider investment sales , leaving your original investments to grow undisturbed.

Further more if you don't take/use the income and leave it in the isa to accumulate, you then have 'new' monies to diversify your investments further.

I tend to agree with other respondents why sell for the sake of it, unless as part of a planned divestment excercise, either to diversify or raise cash for a specific purpose.

Diesel3390

@HappyHarry
@Linton
@cloud_dog
@dunstonh
@poseidon1

Hi all. Thanks for the very useful comments. 

I guess you have all hit on different aspects of what I am thinking.
Regarding the example, yes it's just a simplified scenario I used to explain my thought process.

The reason why I want to "take" profits is because as you all saw, the S&P was doing pretty well until the summer, and then there were some significant "minor" crashes and I basically lost all my profits for the year, which left me thinking, how do I lock in the profits "as they come".

So the fundamental question is: instead of just sitting back and letting it grow over time, and basically riding all the highs and lows, is there a good way to think about "taking profits" in intermediate steps as the market grows? So let's say every time I make £100 profit then taking £20 of that profit? (Just an example....). Or is that a bad strategy? Should I just not touch the pot at all?

Like some of the comments say, I see three options:
A) Take "some profit as they come". This is basically my question. Is it a bad investment strategy?
B ) Use an income version of the ETF: actually this is something I hadn't thought of. I leave the investment intact and instead just get the income distribution that the ETF pays out. @poseidon1 - does the growth of the ETF suffer quite significantly when we compare income vs accumlation versions of the same ETF?
C) I could basically just never touch the fund and instead save some of my paycheck money and allocate that towards spend instead.

Any thoughts appreciated.

cloud_dog

What would you do with this imaginary £20 profit?

How would you feel if the day after selling and realising your £20 'profit' the fund went up 1%?  (then see Q1).

I ignore my investments (as such) until I am getting closer to their target or planned utilisation time.

eskbanker

Diesel3390 said:

Take "some profit as they come". This is basically my question. Is it a bad investment strategy?

Ignore the AI-generated nonsense in the post immediately above this one (at the time of posting, it may not survive, I'm not referring to cloud_dog's one!) - it's unlikely to be an optimal strategy but what is it that you're trying to achieve?

On the face of it, buy low and sell high is ideal but only for those able to pick the highs and lows, which is obviously not straightforward, otherwise everyone would do it!  The basic premise of investing is that there will be more up days than down ones, and so any sales are reducing future growth potential, but the important thing to consider is investment timescales, in that most investors, as opposed to traders, will be 'buy and hold' for the long term rather than wanting to tinker to try to get short term wins.

LHW99

I have only done the "Take Profits" idea a couple of times, both a while ago.

One was when the Russian stock market crisis in 1998, when I had a specific (individual) share which became very volatile. I sold in and out a few times, and doubled what was a few hundred initial investment. At the time that seemed great to me!

The second was when I put a couple of £k in an IT, which doubled. I took out half the stake, and the remainder doubled again, so I took another half of the new amount. When the remainder doubled a third time I sold out. It went a bit higher, and then dropped so I was lucky.

I was younger then, and wouldn't do it now, although I do sometimes set stop-loss markers if I'm not too bothered about keeping a holding any longer.

poseidon1

Diesel3390 said:

@HappyHarry
@Linton
@cloud_dog
@dunstonh
@poseidon1

Hi all. Thanks for the very useful comments. 

I guess you have all hit on different aspects of what I am thinking.
Regarding the example, yes it's just a simplified scenario I used to explain my thought process.

The reason why I want to "take" profits is because as you all saw, the S&P was doing pretty well until the summer, and then there were some significant "minor" crashes and I basically lost all my profits for the year, which left me thinking, how do I lock in the profits "as they come".

So the fundamental question is: instead of just sitting back and letting it grow over time, and basically riding all the highs and lows, is there a good way to think about "taking profits" in intermediate steps as the market grows? So let's say every time I make £100 profit then taking £20 of that profit? (Just an example....). Or is that a bad strategy? Should I just not touch the pot at all?

Like some of the comments say, I see three options:
A) Take "some profit as they come". This is basically my question. Is it a bad investment strategy?
B ) Use an income version of the ETF: actually this is something I hadn't thought of. I leave the investment intact and instead just get the income distribution that the ETF pays out. @poseidon1 - does the growth of the ETF suffer quite significantly when we compare income vs accumlation versions of the same ETF?
C) I could basically just never touch the fund and instead save some of my paycheck money and allocate that towards spend instead.

Any thoughts appreciated.

You make a reasonable point about potentially impacting long term growth of the etf  income units if  chosen in favour of accumulation. You may lose the potential for compound growth of the dividend income that would otherwise be automatically reinvested in the etf via the accumulation units.

 However, by the same token, you have no control over the price point at which that income is reinvested which may inconveniently be at times the etf price spikes and then subsides.  I personally prefer to have control over when and where my dividend income is invested. 

That said, there is a difference in quantum. You stated an etf investment of just £1,000. Income therefrom would be a modest £30 to £40 ( ftse 100 ) for the year, so not really worth  the effort of personally reinvesting until perhaps after  4 or 5 years of accumulated cash is available ( unless you can reinvest at no additional cost). For that quantum I would  be inclined to agree with other respondents and let the  etf profits ( via accumulation units) ride out the peaks and troughs over  the longer term, with the aim of 'harvesting' profits ( if desired ) at a far higher level.

 In my case, the intial etf investment  would more likely be in the £15k to £20k range, so significantly more dividend  income being produced to be deployed elsewhere, as and when it arises .